Building A Better Franchise Agreement

08/14/2017

Nevada Governor Brian Sandoval recently signed Assembly Bill 276 (“AB 276”), which articulates new rules and requirements for non-compete agreements, some of which fundamentally alter the legal landscape for the enforcement of covenants not to compete. Most notable among the new law's requirements is the mandate that courts mustrevise language that might otherwise render non-competes unenforceable. The new law should provide comfort to franchisors operating in Nevada by closing a significant loophole left open last year by the state's Supreme Court.

New Requirements for a Non-Compete Agreement to be Enforceable

According to the new law, to be enforceable a covenant not to compete must:

Be supported by valuable consideration (the grant of a franchise or license will almost certainly be sufficient);

Not impose any restraint that is greater than necessary for the protection of the party for whose benefit the restraint is imposed;

Not impose any undue hardship on the restricted party; and

Impose restrictions that are appropriate in relation to the valuable consideration supporting the non-compete covenant.

Confidentiality and Non-Disclosure Agreements

The new law does not prohibit agreements to protect a party’s confidential and trade secret information if the agreement is supported by valuable consideration and is otherwise reasonable in scope and duration.

Courts are now Required to “Blue Pencil” Non-Compete Language that is Overbroad

This is by far the most significant part of the new law and the aspect that should give franchisors with Nevada-based franchisees the most comfort. But first, a bit of background.

Generally speaking, courts across the country have adopted one of three approaches when addressing over-broad restrictive covenants; these approaches are generally referred to with some variation of the term "blue penciling." When a court faces a non-compete that it finds objectionable based on some aspect of the provision, a court may use one of these approaches:

The court may reject the restrictive covenant in its entirety. In other words, because some aspect of the covenant goes too far in its restrictions, the court may refuse to enforce the covenant at all. This is known as “no blue penciling”.

The court may strike (delete) the parts of the covenant that it believes are overbroad, and leave the rest of the terms of the covenant unchanged. This is known as “strict blue penciling."

The court may choose to revise (rewrite) the restriction to make it reasonable. This is known as "general blue penciling" or "red penciling."

Prior to AB 276 becoming law, Nevada courts used the most conservative of all of these approaches. The Nevada Supreme Court held in the case Golden Road Motor Inn, Inc. v. Islam, 376 P.3d 151, 153 (2016) ("Golden Road") that Nevada law prohibited any form of blue penciling whatsoever, which meant that any part of a covenant not to compete the court determined objectionable would require the court to refuse to enforce the non-compete in its entirety.

Now, however, so long as a non-compete is supported by valuable consideration, Nevada’s courts are obligated to revise overbroad restrictions that impose a greater restraint than is necessary to protect the enforcing party’s interests and impose an undue hardship on the restricted party. The revisions must cause the limitations (e.g. time, geographical area, and scope of activity to be restrained) to be reasonable and no greater than necessary to protect the interest of the enforcing party. Stated differently, a Nevada court must now generally blue pencil (or red pencil) a covenant not to compete that the court believes is overbroad.

Bottom Line

AB 276 is a big victory both for employers and franchisors, which no longer need to worry about a court completely refusing to enforce a non-compete in the state. Agreements that may have been found to be void under Golden Road can now be revised and enforced in Nevada. As a result, franchisors can now enter the Nevada market with confidence, assured that courts in the state will not refuse to enforce the covenants not to compete that are commonly contained in franchise agreements.

- Special thanks to my employment law partner, Rob Rosenthal, who prepared a summary of the new law upon which this article was based (which also served as a first draft for this piece).

08/27/2015

Last night I reviewed a franchise agreement and found a surprising, and illegal, provision buried deep in the contract. If ever there was a compelling case for being careful when you are choosing legal counsel, I just found the provision that makes it.

But first, some background. My law practice involves representing both franchisors and prospective franchisees. For franchisors, I primarily draft franchise disclosure documents (“FDDs”) and franchise agreements; I assist my clients in obtaining franchise state registrations; and I assist them with day-to-day issues that arise in running their businesses. For prospective franchisees, I will review their proposed franchise agreements and FDDs and help them understand what they will be committing to do if they decide to buy the franchise. If the franchise company is willing to negotiate, I help prospective franchisees through that process.

I find that reviewing other companies’ FDDs and franchise agreements also helps me in my practice for franchisors; it’s always instructive to see what other industry leaders are doing. I have noticed that, in a small minority of systems, some franchisors go well beyond what is legally permitted to be included in the franchise agreement and include provisions that unquestionably violate the FTC Franchise Rule (the “Franchise Rule”) as well as various state franchise laws.

The Provision

If you’re on either side of the franchise relationship, you should know if your contract has a provision like this one. Pull out your franchise agreement now. Go ahead, I’ll wait.

You have it now? Good. Here’s the provision we’re looking for:

Release of Prior Claims. By executing this Franchise Agreement, Franchisee, and each successor of Franchisee under this Franchise Agreement forever releases and discharges Franchisor and its Affiliates, Its designees, franchise sales brokers, if any, or other agents, and their respective officers, directors. representatives, employees and agents, from any and all claims of any kind, in law or In equity, which may exist as of the date of this Franchise Agreement relating to, in connection with, or arising under this Franchise Agreement or any other agreement between the parties, or relating In any other way to the conduct of Franchisor, its Affiliates, its designees, franchise sales brokers, if any, or other agents, and their respective officers, directors, representatives, employees and agents prior to the date of this Franchise Agreement, including any and all claims, whether presently known or unknown, suspected or unsuspected, arising under the franchise, business opportunity, securities, antitrust or other laws of the United States, any stale or locality.

In plain English: “you, the franchisee acknowledge that we, the franchisor, may have lied to you and might be lying to you right now. Our entire FDD might be one of the greatest works of fiction since Moby Dick. You agree, however, that you waive all your legal rights to take action against us based on those lies, even if you have invested hundreds of thousands of dollars of your hard-earned money in this phony business.” Wow.

Do you have that one in your franchise agreement? You might have to do a bit of hunting for it. You would think something like that would be on the first page, bolded, in caps, with a box around it and perhaps accompanied by a self-lighting sparkler that draws your attention directly to the provision when you open the contract. But no, in the case of the contract in which I found this provision, it was buried on page 36 of a 39-page franchise agreement, with no particular emphasis placed upon it.

I will never include a provision like this in a franchise agreement I draft, nor will I ever recommend that a prospective franchise buyer sign a contract when it includes this provision. Why? It's not only unfair, but it's also illegal under the Franchise Rule and under various state franchise laws.

The Problem with Having the Provision

Now, I highly doubt that in most situations, the franchisor even knows this provision is in its franchise agreement. Most start-up franchise companies trust their franchise counsel to draft the agreement and don’t necessarily carefully consider each provision in the contract. This sort of provision is typically created by counsel, who is seeking to protect his or her client. An admirable goal, to be sure.

07/30/2014

If you are a businessperson, sooner or later you will have to deal with a lawyer. In the franchise world, it helps – tremendously – to deal with attorneys who understand franchising and franchise law. It doesn’t matter whether you are a franchisor or a franchisee; no matter which side of the transaction you happen to be on, you will want an experienced franchise attorney to be on the other side.

Surprisingly, the level of franchise law knowledge among attorneys who actually get involved in franchise transactions varies considerably. The majority of the time, lawyers who are knowledgeable in franchise law are on both sides of the transaction. But that is not always the case. Sometimes, the attorney on the other side is inexperienced, and “dabbling,” in franchise law.

This article explores the problem of inexperienced counsel from the point of view of the franchisor, which is using an attorney that has little or no familiarity with franchise law (or, even worse, the company is using a consultant who is not a lawyer).

Why Franchisors sometimes use Inexperienced Legal Counsel

If a company is considering franchising its business (a “start-up” franchisor), one of the first things the company does is look for legal counsel. Finding an experienced franchise attorney is not a simple task; there are only a few hundred attorneys in the country that specialize in franchise law. A start-up franchisor may look to its local business attorney to help the company draft its franchise agreement and franchise disclosure document (“FDD”), and otherwise help the company comply with its legal obligations.

The business attorney may be tempted to do the work, instead of referring it to another lawyer. After all, form FDDs and franchise agreements are relatively easy to find, and many of them look similar to one another. But the problem is that franchise contracts and FDDs aren’t “one size fits all” legal documents, and the franchise relationship isn’t a typical business relationship. It is critical for attorneys who work in franchising to understand the documents they draft, the legal requirements for disclosure (both federal and state), and how the pieces of the documents need to fit together.

10/01/2013

One of the most common provisions in franchise agreements is the “forum-selection” clause. Under these provisions, the parties agree that any lawsuit filed by either one of the parties will be brought only in a court in a specified city and state. The chosen court will almost always be in the city where the franchisor has its home office.

A forum-selection clause is used as a cost-shifting tool in franchise contracts. The franchisor, which presumably has a large number of franchisees in diverse geographic locations, would find it financially burdensome to have to hire different lawyers in a number of different states to defend or prosecute lawsuits against its franchisees. Using the forum-selection provision, it shifts the burden of traveling for a lawsuit (and obtaining counsel in a sometimes-remote forum) to the franchisee.

Some states have laws that consider forum-selection clauses in franchise agreements to be void – so that a franchisee protected by the state law will be able to sue and be sued in his or her home state. Other states will stop short of voiding those provisions, but will permit a franchisee who sues the franchisor first to do so in his / her home jurisdiction.

Case Study: Maaco Franchising, Inc. v. Tainter

Even where these state laws do exist, they don’t always carry the day. Take, for example, the recent case involving Maaco Franchising and two California-based franchisees. In 2004, Maaco entered into a franchise agreement with Richard and Diane Tainter for the operation of a Maaco automotive painting and repair shop located in Palo Alto, California.

The Franchise Agreement

The franchise agreement contained a Pennsylvania choice-of-law provision, as well as a forum-selection provision requiring that all litigation occur in Pennsylvania federal or state courts. Under the franchise agreement, the Tainters agreed that they would submit to the personal jurisdiction of Pennsylvania courts, and waived all objections to the jurisdiction or venue of any action brought in Pennsylvania. This type of language – requiring a franchisee to waive objections to the jurisdiction of the other state’s courts – is common in franchise agreements.

Before signing the franchise agreement, the Tainters also received a franchise offering circular with a California-specific addendum. This type of addendum can be found in any franchise disclosure document where the franchisor is registered to sell franchises in a registration state like California.

The California addendum in the agreement stated that California has a statute that “might supersede” the franchise agreement, “including the areas of termination and renewal.” Importantly, however, the franchise agreement itself did not have any state-specific addendum modifying the terms of the contract.

07/29/2013

Another interesting decision has come down regarding the use of exculpatory clauses in franchise agreements -- and this time, the decision went in favor of the franchisee. Exculpatory clauses are provisions that parties use to disclaim the making of any promises, representations, or statements outside of the contract. Such provisions are commonly used by franchisors in franchise agreements to give the franchisor the assurance that their franchisees are not relying on any promise, statement, or representation that was made before signing -- many of which the franchisors may not even be aware (for example, those that were made by salespeople speaking beyond the limits of their authority).

The most common form of exculpatory clause is an integration clause, which in most contracts goes by the title "Entire Agreement." An example of an integration clause (taken from the franchise agreement in this case) is below. Often, a franchisor will be able to rely on an integration clause and other exculpatory provisions to avoid liability in court for promises that were allegedly made to a franchisee that are not reflected in the terms of the franchise agreement. But other times, a badly-written or otherwise non-comprehensive exclupatory clause will not provide a sufficient shield to a franchisor to avoid liability. The C&M v. True Value case, from the Wisconsin Court of Appeals, provides a good example of how courts can sometimes find that a franchisor's exculpatory clause is insufficient to protect it from liability for an alleged misrepresentation.

In this case, C&M was a True Value hardware store franchisee for a short time, having only operated the store for less than a year before closing it due to financial reasons. Shortly after closing the doors, C&M sued True Value, claiming that (among other things) that True Value misrepresented the possible performance of the franchise business.

The franchise agreement in question, called a "Retail Member Agreement" (the “Agreement”) was signed by C&M and contained two different exculpatory clauses that said:

[True Value] has not represented to [C&M] that a “minimum,” “guaranteed,” or “certain” income can be expected or realized. Success depends, in part, on [C&M] devoting dedicated personal efforts to the business and exercising good business judgment in dealings with customers, suppliers, and employees. [C&M] also acknowledges that neither [True Value] nor any of its employees or agents has represented that [C&M] can expect to attain any specific sales, profits, or earnings. If [True Value] has provided estimates to [C&M], such estimates are for informational purposes only and do not represent any guarantee of performance by [True Value] to [C&M]. [TRUE VALUE] MAKES NO REPRESENTATIONS OR WARRANTIES EITHER EXPRESS OR IMPLIED REGARDING THE PERFORMANCE OF [C&M’S] BUSINESS.

And

This Agreement, and any other agreement which [C&M] signs with [True Value], is the entire and complete Agreement between [C&M] and [True Value] and there are no prior agreements, representations, promises, or commitments, oral or written, which are not specifically contained in this Agreement or any other agreement which [C&M] signs with [True Value]. The current form of the Company Member Agreement shall govern all past and present relations, actions or claims arising between [True Value] and [C&M].

Based on these two exculpatory clauses, the trial Court determined that C&M was placed on notice that anything True Value said could and did not constitute representations or warranties about the possible performance of the business. Based on this holding, the trial Court dismissed C&M’s misrepresentation claims.

06/18/2013

A recent decision from a federal court in California addresses the enforceability of a general release of claims signed by former franchisees. Quick tutorial: a "general release" is a document where the signing party (releasor) agrees to relinquish the right to enforce or pursue any and all legal claims against the non-signing party (releasee). While general releases in the franchise context are usually unilateral (given by the franchisee, or former franchisee, to the franchisor), they can be and sometimes are mutual.

The court decision deals with Grayson and McKenzie, who are former franchisees of 7-Eleven, Inc. Grayson and McKenzie are also the name plaintiffs in a class action lawsuit they filed against 7-Eleven relating to 7-Eleven’s collection of a federal excise tax on pre-paid telephone cards they and other franchisees sold at their respective stores. When those cards were sold, 7-Eleven collected excise taxes from the plaintiffs, and paid those taxes to the federal government.

In 2006, the federal government stopped collecting excise taxes on pre-paid phone cards. The government authorized a one-time refund of the tax for payments made between March 2003 and July 2006. The federal government made refund payments to 7-Eleven for millions of dollars, but the franchisees in the lawsuit alleged that 7-Eleven did not return any portion of the payments to them, even though those franchisees believed they were entitled to a 50% share of the refunded money.

The reason the franchisees believed they were entitled to a portion of the tax refunds was because of the way the 7-Eleven system is structured. While most franchise systems are designed so that the franchisee will pay the franchisor a royalty fee (as well as other fees) based on the franchisee's gross sales, 7-Eleven’s system is built differently. In the 7-Eleven system, 7-Eleven and the franchisee will split the store’s gross profit as well as the operating expenses.

Based on the "share and share alike" operating structure, the plaintiffs in the lawsuit alleged that they were entitled to a 50% pro rata share of the excise tax refunds received by 7-Eleven. The franchisees sued 7-Eleven for: (1) conversion; (2) money had and received; and (3) breach of implied contract.

7-Eleven moved for summary judgment on Grayson and McKenzie’s claims, asking the court to dispose of the franchisees' claims. 7-Eleven based its request on general releases that the franchisees had each signed in 2004 and 2005, respectively, when they terminated their franchise agreements with the company.

All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.

In essence, the franchisees argued that their general releases could not be used to dispose of their legal claims because 7-Eleven had engaged in intentional wrongdoing, and that California law does not permit 7-Eleven to obtain a release of those types of claims from the franchisees.

02/11/2013

A new ruling by the United States Court of Appeals for the First Circuit in Awuah v. Coverall case, No. 12-1301, --- F.3d --- (1st Cir. Dec. 27, 2012), is yet the latest in a string of recent court decisions that confirm the strength and enforceability of arbitration clauses in franchise agreements.

The Awuah case first made waves two years ago when the United States District Court for the District of Massachusetts compared the franchise relationship between Coverall (a janitorial service franchisor) and its franchisees to a “modified Ponzi scheme.” You can read more about that decision in my prior blog posts here and here. This latest ruling deals with the enforceability of the arbitration clauses in a number of the subject franchise agreements.

The facts can be summarized as follows: a class of franchisees sued their franchisor, Coverall North America, which is a janitorial cleaning service. The franchisees assert several state-law claims against Coverall, including claims for breach of contract, misrepresentation, and deceptive and unfair business practices. In addition, the franchisees claim that Coverall misclassified them as independent contractors when they are, in fact, employees, and that Coverall failed to pay wages due to them.

Appellees, who are a subset of the overall class, challenge Coverall’s contention that appellees should be required to arbitrate the dispute based on arbitration clauses in the subject franchise agreements. Appellees became Coverall franchisees by signing Consent to Transfer Agreements, or Guaranties to Coverall Janitorial Franchise Agreements. These documents did not themselves contain arbitration clauses, but instead incorporated by reference the terms and provisions of the transferor’s franchise agreements, which did contain such clauses. None of the appellees allegedly received (or requested) copies of the franchise agreement signed by its respective transferor.

Appellees argued to the U.S. District Court for the District of Massachusetts that “it is black-letter law in the First Circuit that an individual may not be bound to an arbitration clause if he does not have notice of it,” citing cases brought under federal employment statutes. Appellees made the point that Coverall had not demonstrated that any of them were shown the transferor’s franchise agreement, or that they were shown the arbitration clause contained therein. The District Court agreed, determining that the appellees did not have to arbitrate their claims against Coverall because they did not have adequate notice of the arbitration clause in the franchise agreement. Coverall appealed.

The U.S. District Court for the First Circuit overturned the District Court’s ruling, finding that under governing Massachusetts law, “one who signs a written agreement is bound by its terms whether he reads and understands them or not.” The Court further found that Massachusetts does not impose any requirement that the parties be given special notice of an arbitration provision. In any event, the Court stated, any such requirement would be preempted by the Federal Arbitration Act, 9 U.S.C. § 1, et seq., which requires that agreements to arbitrate be treated in the same manner as other contracts.

This latest decision serves as a reminder for prospective franchisees to carefully review a proposed franchise agreement before signing. For existing franchisees, it is a warning that mandatory arbitration clauses are not easily avoided. For franchisors, the decision highlights the importance of ensuring that, when a franchisee transfer or assign their franchises, the new franchisees receive and sign a full copy of the franchise agreement that will be effective post-sale.

12/04/2012

Welcome to my "Franchising In The Movies" series. For those of you that have been here before, welcome back. For my new readers, a brief explanation: this series is the marriage between my passion (the movies) and my career (I am a franchise attorney). Don't take any of this literally, because none of the analogies in this series are perfect. With that disclaimer, I do think there are some interesting comparisons between movies and real-life lessons in franchising and small business. As an added bonus, these entries are fun to write.

As I write this in December 2012, we are back into the beginning of Hollywood's "awards season": the time when the studios release the movies that they consider to be contenders for the industry's top film awards. At the end of every year, my wife and I make a list of all of the movies we saw that year (our present 2012 count is 125) and create a list, ranking our top 10 and bottom 10 movies for that year.

Last year, the movie at the top of both of our lists was the eventual Best Picture Oscar® winner, The Artist. I thought The Artist had all of the characteristics of a great movie: well-written characters, engaging story, a beautiful score, excellent actors, flawless direction, etc. As I think about the great movies from 2011 in comparison to those I've seen in 2012, I am continually reminded of The Artist. If you haven't seen it yet, you should. It's a magical movie about making movies.

(Spoilers follow; stop reading if you haven't seen the movie and plan to do so. Click here to continue reading).

11/09/2012

A recent Maryland court decision in a franchise dispute demonstrates the importance of a carefully-drafted arbitration clause.

The case, Meena Enterprises, Inc. v. Mail Boxes Etc., Inc., Bus. Franchise Guide (CCH) ¶14,910 (D. Md Oct. 13, 2012), involved a dispute between Mail Boxes Etc. ("MBE"), a franchisor of mailing services businesses. In March 2001, United Parcel Service purchased MBE. At the time of the acquisition, UPS announced that MBE franchises would continue to offer choices among delivery services (e.g., UPS, Federal Express, and Airborne Express), but that “the relationships may be altered somewhat” as a result of the purchase.

Plaintiff Meena Enterprises, Inc. (“Meena”) was a franchisee that operated two MBE franchises pursuant to Franchise Agreements that it assumed in August 2001; the Agreements were signed by Mail Boxes Etc. USA, Inc. (an affiliate of MBE) and not MBE itself. One franchise was located in the University of Maryland Student Union; the other located in College Park. During the initial term of the Agreements, MBE and UPS allowed Meena to continue to operate their franchise in the University of Maryland student union as an MBE store because Meena “was required to offer Federal Express shipping services” under its lease with the school.

When it came time to renew the Agreements in 2011, MBE purportedly insisted that the University of Maryland location be converted to a UPS store. Meena advised MBE that conversion was not possible because of the University’s FedEx requirement. Given MBE's alleged lack of marketing support for the MBE brand, Meena requested that MBE allow it to operate the Student Union location as an independent store after the Franchise Agreement expired. MBE did not respond to this request prior to both Franchise Agreements’ expiration in August 2011.

Meena sued in January 2012, asserting claims against MBE for breach of contract, fraudulent inducement, and negligent misrepresentation, and sought a declaratory judgment to preclude MBE from enforcing the covenants not to compete that were contained in the Agreements.

10/09/2012

A popular contractual tool for franchise systems is a mandatory arbitration provision. Under this type of provision, the parties to a dispute are limited in their ability to seek relief through the courts, and instead must submit all disputes to be heard by one or more third party decisionmakers, known as "neutrals" or "arbitrators." A neutral is usually (but not always) an attorney who may or may not have prior judicial experience. The neutral will, like a judge, hear evidence from both sides and will consider their arguments before rendering a decision that will be binding on both parties. In arbitration, the decisions of neutrals are appealable only under very limited circumstances. Much has been written about the benefits and drawbacks of mandatory arbitration provisions (see, for example, this article ), and I won’t endeavor to address those issues here.

Courts and neutrals will typically look to the language of the agreement to determine whether certain types of disputes must be submitted to arbitration, or whether instead the parties will be permitted to litigate them in court. Unless there is an overriding reason (for example, a statute that prevents enforcement or a question as to whether the contract is valid), both courts and neutrals will enforce an arbitration clause as written. As a result, when the parties choose to arbitrate disputes, they must pay careful attention to the wording of the contract.

During the past several years, the issue of class/group arbitration – where a number of individuals will attempt to arbitrate claims that are common to all of them – has become more prominent. In the franchising world, a number of independent associations of franchisees have attempted to use the group arbitration model to pursue legal claims against their franchisors. From the franchisee’s perspective, group arbitration is an attractive alternative because it enables them to share resources and reduce their individual costs. From the franchisor’s perspective, group arbitration is problematic for a variety of reasons; for example, in the context of a dispute a franchisor typically sees the circumstances of its franchisees as being disparate enough to warrant separate arbitration proceedings for each one of them. As a result, franchisors will usually want to avoid group arbitrations.

A pair of recent decisions involving the Fantastic Sam’s franchise system highlights the importance of careful drafting of arbitration clauses for franchise companies that want to avoid having to arbitrate disputes on a group-wide basis. In FSRO Association Ltd. v. Fantastic Sam’s Franchise Corp., an association of franchisees sought to arbitrate their claims against the franchisor as a group, arguing that the language of the arbitration clause in their contracts was broad enough to permit associational claims. Specifically, the relevant contractual language said:

"Any controversy or claim arising out of or relating in any way to this Agreement or with regard to its formation, interpretation or breach shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association."

In spite of this broad language, the franchisor sought a court order prohibiting the group-wide arbitration and compelling each of the franchisees to arbitrate their claims on an individual basis. The U.S. Court of Appeals for the First Circuit held that the arbitrator, and not court, should decide whether the group arbitration was permitted by the franchise agreement. This was because the question of whether group arbitration was permitted was not a "gateway issue" that related to whether the case was arbitrable or not (which ordinarily is decided by courts), but instead was an issue regarding the scope of the arbitration itself. As a result, the Court refused to reach the question of whether group arbitration would be permitted, instead leaving that decision to be made by the arbitrators.

Having the question placed firmly before them, the panel of neutrals selected by the parties noted that the arbitration clause was completely silent on the issue, as it did not use the words "association, group, class, aggregate, or consolidated," and did not limit the arbitration requirement to "all disputes between the parties," or words to that effect. Instead, the panel determined that the language used in the parties' arbitration clause was extremely broad, and its lack of express limitations on group action would be interpreted as permitting such group arbitration. As a result, the franchisee association was permitted to go forward on a group-wide basis.

The Fantastic Sam's decision serves as yet another reminder to franchise companies of the importance of careful drafting in franchise agreements, and in arbitration clauses in particular (I wrote about another arbitration clause-drafting issue in June). If you want to avoid having to arbitrate with a class or group of franchisees, you should have language in your franchise agreement that specifically prohibits group- or class-wide arbitration. This can be done by including language like "any arbitration between the company and the franchisee shall be of the claims related to the franchisee only, and will not be conducted on a class-wide or group basis," or words to that effect. While having that language does not guarantee that a court or neutral(s) will choose to enforce it, it is much more likely that you will be able to avoid mass arbitrations if you have that language in your agreement.

Matthew Kreutzer is a Partner at Howard & Howard Attorneys and serves as Chair of the firm's Franchising, Distribution, and Antitrust Practice Group. Mr. Kreutzer, who is based in the firm's Las Vegas office, is a Certified Specialist in Franchise and Distribution Law by the State Bar of California's Board of Legal Specialization.

About This Blog

This blog is dedicated to advancing the franchising industry through the sharing of business, legal, and practical information and ideas. This blog is a service of Howard & Howard's Franchising, Distribution, and Antitrust Practice Group.